The McKinsey Quarterly has a very interesting article (note: registration required) on the global financial markets:
The McKinsey Global Institute (MGI) has conducted a yearlong research effort on the world’s financial markets and created a comprehensive database of the financial assets of more than 100 countries since 1980. Together, these assets make up the global financial stock.
This research yielded several notable observations. One of them is simply that global capital markets are huge: we calculate that the world’s financial assets now total more than $118 trillion and will exceed $200 trillion by 2010 if current trends persist. The stock of global financial assets has grown faster than the world’s GDP, indicating that financial markets are becoming deeper and more liquid. With a few qualifications, this trend bodes well for the world’s economies, since deeper markets provide better access to capital and improve the allocation of risk.
This supports my gut feel that many markets are awash in money, as evidenced by larger and larger VC deals, and boom-era valuations for some companies. 😉
- Mary Meeker’s 2014 Internet Trends report - May 28, 2014
- Andreessen-Horowitz raises $1.5B for its new fund - February 1, 2012
- WestBridge launches India “evergreen” fund - November 15, 2011
I think the scenario thats happening is slightly different:
More money supply + less demand =
Outcome 1: Overfunding => overspends
Outcome 2: Too many similar startups getting funded => higher failure rate
Would be great to see some data coming on this… remember seeing something about overfunding (or rather, average deal sizes going up) but nothing on failure rates.
Unfortunately, doesnt necessarily lead to more money to emerging markets — thats a separate risk category… and there are views and counterviews about the ability to make “venture” returns here…
There’s a double-whammy as tech start-ups require less money than before. At least in consumer-oriented businesses, it takes a few smart guys and a router to quickly get out an alpha-version developed on open-source software, get free word-of-mouth marketing and sign up tons of users. Of course, they still have to make money, but it costs a lot less to get the product out.
More money supply + less demand = higher valuations = lower returns.
Then again, this means more money moving to emerging markets, including India, in search of greener pastures (i.e. higher returns). Good for us.